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Financial Crisis Inquiry Commission's report is too late (or early) to matter

By DANIEL WAGNER and MARCY GORDON
The Associated Press

Friday, January 28, 2011 - Page updated at 04:00 a.m.

WASHINGTON — A government panel's failure to reach a firm conclusion about what caused the financial crisis shows how complex Wall Street has become and how partisan Washington has grown.

The blurriness of its report, which includes discussion of Washington Mutual and its demise, comes months after a new law already has begun tightening financial rules to prevent another crisis.

All of which raises a question: Do the findings of the 633-page report matter?

In its report, the Financial Crisis Inquiry Commission (FCIC) blames a range of obvious culprits: Banks that made reckless bets. Credit-rating agencies that endorsed risky mortgage bonds. Government regulators who overlooked danger signs until they threatened the global financial system.

It concludes that the crisis might have been prevented if banks had been more careful and regulators had asked tougher questions.

In a chapter titled "Crisis and Panic and Conclusion," the report recounts the collapse of Seattle-based Washington Mutual and the takeover of its banking operations by JPMorgan Chase. It discusses the role of the Federal Deposit Insurance Corp. and particularly its decision not to use FDIC funds to protect unsecured creditors of the bank.

The report notes the decision would be "hotly debated." Scott Alvarez, general counsel of the Federal Reserve, said he agreed with FDIC Chairman Sheila Bair that "there should not have been intervention in WaMu."

Treasury officials felt differently, the report notes. It quotes Neel Kashkari, head of the Office of Financial Stability who told the commission:

"We were saying that's great, we can all be tough, and we can be so tough that we plunge the financial system into the Great Depression. And so, I think, in my judgment that was a mistake. ... [A]t that time, the economy was in such a perilous state, it was like playing with fire."

Sowing dissension

The views underlying the commission's conclusions — that the crisis could have been prevented — have long since become mainstream in the more than two years since the crisis peaked. Yet among panel members, the conclusions sowed dissension.

In the end, the commission's six Democratic appointees embraced its conclusions. The four named by Republicans did not; they offered their own reasons for the crisis — and three complained that the majority's conclusions were too broad.

The absence of a sharp and unifying message dulls the report's impact, analysts say.

"If only one side is picking and pulling different facts and trying to weave them into a narrative, you don't end up with a cohesive final product that's useful in policymaking," said Paul Atkins, a former member of the Securities and Exchange Commission (SEC).

The report's conclusions are also too generic to help steer regulators who have been writing rules for the financial-overhaul law enacted last summer, Atkins said.

A year ago, the report might have shaped the new financial rules now taking effect. Alternatively, if the commissioners had waited a few years, they might have been able to detect flaws in the new financial regulations and suggest improvements.

"The report is going to sit on people's credenzas until we need to come up with additional policy alternatives" for the next potential crisis, said Daniel Alpert, managing partner at the investment bank Westwood Capital.

The timing was largely out of the commissioners' hands. The original deadline of Dec. 15, 2010, was in the law that created the panel. That's a full year after the House voted on the financial-regulatory measure. By then, the commission had only just begun to interview 700 witnesses, review millions of pages of documents and hold 19 days of hearings.

Even if the panel had finished its work much earlier, the partisanship that divided the commissioners would have limited their ability to shape the regulatory overhaul. The Republican-appointed members didn't even show up for the news conference.

Even members of the same party couldn't agree.

One dissent by Republican commissioners blamed a global credit bubble fed by low interest rates. A separate lone dissent pointed a finger at policies that were intended to encourage homeownership. These included the government's support of mortgage giants Fannie Mae and Freddie Mac.

The panel has referred cases of possible criminal wrongdoing to the Justice Department for investigation.

FCIC Chairman Phil Angelides told reporters that the group "fulfilled our obligations and referred matters to the appropriate authorities."

The report and the dissenting findings found fault with Wall Street banks, mortgage lenders, people who failed to carefully review their mortgages, two presidential administrations, two Federal Reserve chairmen and the current Treasury secretary.

The panel faulted the view expressed by some regulators that markets are "self-correcting" and banks can police themselves. Former Fed Chairman Alan Greenspan pushed this hands-off approach for decades at the urging of the industry, the report said.

Fed didn't force tighter rules

But complex investments backed by risky subprime mortgages were barely understood by regulators and bank executives, the panel found. The Fed was the only entity that could force higher standards on lenders that would have slowed the torrent of deals that fed the crisis, it said.

Experts say historians and scholars will see the report as only one of many documents that will contribute to the story of the financial crisis.

"It's going to matter," said Douglas Elliott, a fellow at the Brookings Institution and former investment banker. "It just won't matter nearly as much as if it were earlier or had a clearer message."

Material from Seattle Times business staff is included in this story.

http://seattletimes.nwsource.com/text/2014060339.html